Volex is seeing revenue, profitability, and contract wins rise exponentially. And it might still be undervalued.
As a long-term FTSE AIM investor, most readers will know that I focus on two high risk sectors: exploratory miners and cutting-edge biotechs. However, I do make exceptions where I consider that a company is undervalued by the market. Harland & Wolff is a great example — and Volex is now another.
The heritage business — found in 1892 — has multiple interests, but the lynchpin is its role as a global provider of dedicated power cords and cables for everything from electric cars to kitchen appliances. The first thing to note is that this is a highly specialised business with a high entry cost. And wide economic moats are my bread and butter.
Further, it serves markets in high-growth sectors. EVs, healthcare, data centres — all will see rapid growth over the next decade, and Volex will grow with them. Now chaired by Nat Rothschild, the company has turned around from collapsing sales and operating losses in 2017 after the loss of a key Apple contract in 2012, to a profitable position.
At 276p, Volex shares have risen by a solid 258% over the past five years. However, it remains some distance from the 494p record high it struck in September 2021 — though much of this decline is down to the tightening monetary atmosphere and wider recessionary environment.
Four key market areas
The £442 million market cap may look high, but the markets Volex serves pay well:
- complex industrial technology — Volex provides in-house overmoulding for low and high-pressure applications and also assists with the mould design and machining needs. It sells high-speed data cables and complex printed circuit board assemblies and harness assemblies
- consumer electricals — it’s a global leader in power cord products and cable harness assemblies, and is a preferred partner for premium electronics and domestic appliance manufacturers. Capacity to manufacture 200 million power cords per year
- electric vehicles — works with leading manufacturers in the EV industry, and has safety approvals in every major market to deliver mains-voltage AC and high voltage DC charging solutions
- medical industry — sells complex cables and full assemblies that are used to deliver critical power, control, and data connectivity for medical devices, passing stringent medical regulatory requirements.
Volex share price: full-year results
Volex reported ‘Strong organic growth with revenue and profit ahead of expectations’ in clearly positive results on 18 April, and the company’s shares have risen by circa a third since. Results are up to date, covering the year to 2 April 2023.
Highlighting its ‘compelling positions in attractive markets with strong structural growth characteristics,’ revenue is now expected to be ‘at least $710 million, representing an increase of at least 15.5% compared with the prior year.’ Further, underlying operating profit is expected to rise by 17.4% to strike $66 million, with further scope for more. Both key figures are far ahead of prior market expectations.
Moreover, the company has delivered margins within its targeted range for three years, despite double-digit inflation — underlying operating margins are expected to rise from 9.1% in FY22 to 9.3% in FY23 — reflecting that economic moat. In other words, Volex can increase its prices and customers will swallow the rise (to a point).
In addition, cash flow is accelerating. Operating free cash flow in H2 was ‘substantially higher than the first half.’ And after spending $46 million in capital investment, dividend payments and acquisitions, net debt has still fallen by $22 million to $76 million.
Rothschild enthuses that he is ‘delighted with the strong organic growth performance delivered by the business during the period. We continue to deliver against the long-term, strategic growth plan that we unveiled last year.’
Where next for Volex shares?
The good news is that the Electric Vehicles, Complex Industrial Technology and Medical sectors all delivered strong constant currency organic revenue growth in FY2023. However, Consumer Electricals is seeing falling demand in line with post-pandemic normalisation.
Volex has highlighted that many customers are actively ‘re-configuring supply chains to focus on partners with high service levels and local facilities.’ Arguably, this is alluding to the constant Chinese pandemic cycle of lockdowns — perhaps having been burnt, clients are prepared to pay a premium for security of supply.
It’s worth noting that the company has an active acquisition pipeline, with a five-year goal of growing revenues to $1.2 billion by the end of FY2027. This may seem a high target, but the turnaround is happening.
On 27 April, it announced another major contract win — this time ‘with a leading, global North American-based automotive manufacturer to supply advanced Electric Vehicle power products.’ Annualised revenues from this one contract are expected to exceed $30 million, with full production anticipated to commence during the 2024 calendar year.
Production will come from the company’s Mexican Tijuana site, where Volex recently invested in doubling capacity — ‘supporting customers who want to simplify their supply chains and secure reliable manufacturing services closer to their production locations.’ Again, it’s a symptom of clients prepared to pay more for ex-China supply. And further capacity is being invested into India, Poland, and Indonesia.
Of course, such rapid share price growth is a risk, as is the danger of overinvesting into ex-China manufacturing capacity in the event that potential customers stick with the cheaper but perhaps less reliable country.
But at its current valuation, Volex shares look appealing for long-term investors with a reasonable risk appetite.
This article has been prepared for information purposes only by Charles Archer. It does not constitute advice, and no party accepts any liability for either accuracy or for investing decisions made using the information provided.
Further, it is not intended for distribution to, or use by, any person in any country or jurisdiction where such distribution or use would be contrary to local law or regulation.
